When a GP-led deal is met with a lukewarm reception by LPs in terms of take-up, what does that signify? In our experience of writing about such processes, it’s a nuanced question to answer.
It could be that pricing is simply not high enough for a sizeable portion of LPs to find the offer attractive. Or, it could be that LPs don’t want to part ways with the fund or the manager. The way a GP-initiated process is approached, communicated and managed is also a determining factor. Idiosyncrasies of a given deal, such as the valuation date used to set the terms of the transaction, or the LP makeup of the fund itself, can all play a part.
The latest example under the microscope is Carlyle Group‘s stapled tender on its $18.5 billion Carlyle Partners VII, which affiliate title Buyouts first reported on last year. This week, the FT reported that LP appetite to sell stakes in the fund has fallen flat, with around 3 percent of the fund on a dollar basis electing to part ways with it.
Definitions of what constitutes a strong take-up rate differ, though there are of course a few guides. Anywhere between 10 percent and 20 percent of fund’s LP base electing to take the liquidity option in a GP-led deal is typically seen as positive. Too large a take-up rate can result in unintended consequences, such as having to find additional investors to back a suddenly humongous deal, as one multi-billion single-asset transaction that closed in recent years demonstrated.
For a GP, a lower level of LPs opting to sell could be seen as a resounding pat on the back that its investors don’t want to part ways with the fund. Alternatively, a 3 percent selling rate isn’t exactly “falling flat” if you’re dealing with an $18.5 billion fund and are only expecting 1 percent of the capital base to sell, as some sources have told us. Based on a stapled commitment of 2-to-1, that also means a fairly chunky primary commitment in the hundreds of millions, based on CP VII’s remaining net asset value of around $21.5 billion as of end-September, as detailed in Carlyle’s Q3 2022 earnings report.
This isn’t to say that a low selling rate has zero implications for a manager. Any stapled tender – or GP-led process for that matter – is an exercise in deftly managing GP-LP relations, not to mention opening up the sponsor to potential press attention and publicity. For the adviser, whose fee is often calculated as a percentage of the ultimate NAV that trades hands, a small selling rate usually means lower fees.
If there is one takeaway from Carlyle’s process this week, it is that LPs appear to not be willing to sell at prices that start with an “8”, as one source told us. Any price offered by secondaries buyers must start with a “9” to really spark selling interest.
How pricing will fare this year remains uncertain, and it’s unclear how much interest the other tender processes in market that Secondaries Investor is aware of will garner. Still, GPs are likely to continue testing them out in this challenging fundraising environment.
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– Chris Witkowsky contributed to this report.